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August 29, 2013

PIMCO’s El-Erian: Don’t Get Too Excited About GDP Growth

Emerging market woes will create (that dreaded word) headwinds for the U.S. economy

PIMCO CEO Mohamed El-Erian. (Photo: AP)

Stronger than expected GDP growth in the second quarter rising to 2.5%; great news, right?

Not so fast, according to PIMCO chief Mohamed El-Erian. Emerging-market woes will create (that dreaded word) headwinds for the U.S. economy.

“Longer term, we should care due to the feedback loop to the U.S.,” El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview with Bloomberg Surveillance on Thursday. “You will see a tightening of financial conditions to markets. You will see growth more challenged and the ability of U.S. companies to get topline growth from emerging markets is going to be less going forward.”

As the news service notes, global stocks, bonds and commodities have been whipsawed since May, when Federal Reserve Chairman Ben Bernanke signaled the prospect of cuts to monetary stimulus should the U.S. economy and job market continue to improve. The Fed will probably pare its $85 billion a month in bond purchases at its Sept. 17-18 meeting, according to 65% of economists surveyed by Bloomberg Aug. 9-13.

For many emerging nations “capital is reversing, flowing out and putting these countries under tremendous pressure,” El-Erian said. “There are certain countries that learned the lessons from the previous crisis and have self-insured tremendously. There are a second set of countries that maintained twin deficits, whose growth dynamics are low and have limited reserves. Turkey is an example of that, and there are others."